Your Right to Know

WASHINGTON — Call it this decade’s Y2K — except this time, there truly is reason to worry.Unless President Barack Obama and Congress agree on a sweeping budget compromise by the time the ball drops in Times Square on New Year’s Eve, it could mark the start of: • An increase of up to 5 percentage points in your federal income tax.

Two percentage points more withheld from your paycheck for Social Security taxes.

An estimated 40,000 jobs lost in the state because of a reduction in federal spending.

And that’s just the beginning.

Higher taxes combined with dramatic cuts in spending — known as the “fiscal cliff” — could be disastrous to an economy sputtering through recovery.Even as Democrats and Republicans remain at a standoff on how to resolve the issue, Ohioans are preparing. According to a study by the Tax Foundation, an Ohio family of four earning $72,764 would see an average income-tax increase of $3,437 — a 4.7 percent chunk of their income.

The expiration of a vast list of tax cuts will affect virtually every American who pays taxes. The IRS will shift withholding to accommodate the new tax rates, meaning if you withhold taxes from your paycheck, then you will see less coming in. You’ll also see less because the expiration of the payroll tax holiday will mean more money withheld from your paycheck.

If you use the child tax credit, you’ll be paying more: The credit will fall from $1,000 to $500 and will no longer be refundable. The so-called marriage tax penalty will return. And about 20 million more Americans might face the Alternative Minimum Tax, originally designed to tax the very wealthy who weren’t paying taxes.

Then there are the federal funding cuts. Because Congress could not agree last year on $1.2 trillion in budget cuts over 10 years, it has instituted sweeping, across-the-board cuts to discretionary programs.

Next year’s cuts will be $109 billion — divided equally between defense and nondefense programs. While some programs, such as Social Security and Pell Grants, are exempt, cuts would impact almost everything else, including the federal prison system, federal flood-control efforts, the National Institutes of Health and Immigration and Customs Enforcement.

Defense installations such as Wright-Patterson Air Force Base and their contractors — which have been a bright spot in Ohio’s economy — would face a particular hit.

“I think the thing that frustrates me the most is this is a point of time in our country that we need to be as productive as we can possibly be,” said Deborah Gross, executive director of DaytonDefense, an organization representing Dayton-area government contractors. “And the inadequacy of the government to get these decisions made in a timely manner affects the productivity of working people out here. That’s just shameful. There is nothing good about this for America. Absolutely nothing.”

Gross compares the budget-cutting process to cutting a family’s budget across the board.

“You’re still going out to dinner, but you’re also cutting 20 percent out of the electricity, the house payment, the car payment — the things you really need that are essential,” she said. “You don’t have enough money in the budget to pay the house budget because you’ve elected to cut across the board, and you still go out to dinner.”

The cuts have yet to happen, and it’s unclear how the situation will play out. But the uncertainty is a killer. People “literally don’t know what’s going to happen to them in another three weeks,” Gross said.

Steve Kelly, vice president for Columbus-based Battelle’s national-security division, said the uncertainty has created a chilling effect for businesses.

He continued: “The government machine is not geared to make all sorts of accounting changes midway through the year, so things stop while they recalibrate. … It just greatly slows down the normal course of business.”

Battelle does about $800 million to $900 million worth of business with the federal government annually, with another $5 billion to operate the federal labs.

On odd-number days, Kelly said, he thinks “the adults will come to the fore and work out a compromise.” On even-number days, he said, he is afraid “the Thelma and Louise crowd” will drive the country over the fiscal cliff. If that happens, he said, “it gets pretty ugly, pretty fast.”

While most in Congress seem to agree that an across-the-board spending cut would be disastrous, the tax issue is among the more contentious subjects in the debate over the fiscal cliff — and it has the potential to affect virtually every taxpayer.

For starters, at the end of this year, the 2001 and 2003 investment and income-tax cuts expire: • If your family makes $17,900 or less a year, your income-tax rate will jump from 10 percent to 15 percent and more money will be withheld from your weekly paycheck. • The 25 percent bracket would rise to 28 percent. • The 28 percent bracket would rise to 31 percent. • The 33 percent bracket would rise to 36 percent. • The top bracket would rise from 35 percent to 39.6 percent.

The Social Security payroll tax will jump from 4.2 percent to 6.2 percent, which means less money in your take-home pay.

Additionally, the patch on the Alternative Minimum Tax is set to expire, meaning as many as 20 million more people could get hit by that tax next year. That tax was originally written to affect wealthy Americans but was never indexed to inflation, so it could particularly hit the middle class if it isn’t fixed.

In addition, a handful of tax provisions affiliated with Obama’s health-care bill would go into effect next year, including a payroll-tax increase for high-income earners and new limitations on Flexible Spending Accounts.

The Tax Foundation, which has studied the impact of the tax increases, estimates that in all, taxpayers will pay $514 billion more next year if something isn’t done.

Some have argued that it might be good to just let the nation go over the cliff. It would, after all, solve many of the nation’s deficit problems. But most economists and many lawmakers say by doing so, the nation risks a recession.

Sen. Rob Portman, R-Ohio, said the economy is already weak, and he’s seeing signs of a chilling effect even though Congress has yet to miss its deadline. “I’m very focused on trying to figure out how to avoid going over the cliff,” he said.

Will McBride of the Tax Foundation said the return to Clinton-era tax rates — combined with new taxes from Obama’s health-care law — could put an onerous tax burden on the public.

But not everyone is convinced the tax rates would represent a lethal hit.

Steve Buser, an Ohio State University professor emeritus of finance, said that if Congress lets the tax cuts expire, rates would go back to Clinton-era tax rates — “and under the Clinton administration, the economy grew very rapidly.”

More worrisome, he said, is whether Congress can actually govern, or whether it’ll be stuck fighting for the next four years.

“It’s much scarier that Congress can’t work together,” Buser said. “The fact that there is or is not going to be an agreement is going to be important. What we end up with, I think, is less important.”